Economist, Telegraph Columnist, Broadcaster

Britain’s Fragile Public Finances Are A Political No-Go Area

Aren’t financial assets “simply pumped up by printed money?” Don’t share prices “need to adjust downward by something like 50pc?” Is it “really the case that if Greece leaves monetary union, other countries won’t follow?” It must “surely be wrong to try solving a debt problem by taking on even more debt?”

These are extremely direct, uncompromising questions. They sound like they were posed by some kind of renegade economist. To talk of financial markets being “very stretched”, to accuse Western policy-makers of “colossal intellectual failure”, or state that quantitative easing is “just buying time, creating zombie banks and companies” is to be widely dismissed as rash – and I should know.

Yet the words quoted above were precisely those I heard last week in Frankfurt, from a series of distinguished panelists and audience members, as I took part in the 68th Annual Summit of the CFA Institute. The language was strong, and the analysis stark, but this was no marginal economics convention.

CFA stands for Chartered Financial Analyst. When it comes to the fund management industry, those three golden letters after your name, earned after a series of grueling exams and years of experience, place you at the top of your profession.
The atmosphere at this highly-prestigious CFA gathering, packed with senior decision-makers from the world’s leading endowments, pension and insurance companies, controlling over $5,000bn of investments between them, was decidedly unsettled. I heard repeated concerns about the still fragile global recovery and dangers growth could unravel. There was disquiet, also, about the ultimate risks of mass money-printing – and, perhaps, even more alarm about what happens when such money-printing ends.

I was involved in several discussions, with me doing most of the listening, about the prospect of a sharp oil price spike, if the Opec exporters’ cartel, having damaged US shale producers by dragging prices down, starts restricting supply once more. The most feverishly debated topic, though, was Grexit – the genuine possibility, dismissed until recently as outlandish, that Greece could crash out of the eurozone.

This UK election is happening at a time of swirling international uncertainty. The dangers to the global economy are legion – not just potential eurozone break-up, but East-West tensions over Ukraine and escalating turmoil in the Middle East, to say nothing of continued systemic dangers posed by Western world’s too-big-to-fail banks. Then there’s the reality that equity prices have been stoked to repeated all-time highs not by strong earnings, or a convincing growth story, but by the advent, or even just the rumored prospect, of even more central bank largesse – be it in the US, Japan or the Eurozone.

These concerns were front-and-centre in the minds of numerous extremely influential people with whom I spoke at last week’s CFA summit. The world’s most important money-managers are now discussing, if only at their own gathering but in increasingly strident terms, the looming threat of a significant financial “correction”.

All this puts our national debate in context. British politicians have spent months ahead of this election arguing over spending commitments four or five years hence, “funded” by future public sector efficiency savings plucked from the air. While dubious at the best of times, such intense debate about tiny fiscal differences, with all the related chest-thumping and finger-pointing, is rendered absurd by the dangers that currently stalk global markets.

Our economic circumstances could be entirely upended by a systemic reversal, whether sparked by eurozone angst, a balance of payments crisis, sovereign default elsewhere, QE-fatigue or some combination thereof. On such vital macroeconomic issues – unprecedented and apparently infinite Western monetary expansion, the absence of root-and-branch banking reform – our political and media classes have been almost entirely silent. It’s as if all the main parties, and their pet commentators, are determined to forget there is any kind of economic problem.

The screaming truth almost no-one in politics wants to face is that, in the face of such dangers, the UK’s public finances remain extremely vulnerable. The latest figures show that in March alone, the government borrowed £7.4bn. While that was slightly down from £7.8bn in March 2014, consider that monthly government revenues – from income tax, VAT, national insurance, the whole shebang – average less than £45bn. To still be consistently borrowing over 13pc of your monthly expenditure, month after month, year after year, is to living way beyond your means. And that’s after “sustained austerity” and an extended period of higher-than-forecast growth – which should strengthen our public finances.

The reality is that the UK’s national debt now amounts to £1,4984bn, having almost doubled over the last Parliament, and on an internationally comparable basis stands at £1,596bn – or 87pc of GDP. The reality is that even this eye-watering and fast-rising total doesn’t include vast public sector pension liabilities, the private finance initiative or a host of other off-balance-sheet items.

The reality is that Central Government Net Cash Requirement during the financial year that’s just ended, the most accurate measure of total state borrowing, was actually £93.6bn, an increase of £15.1bn compared to the year before. The reality is that the only reason the UK sovereign bond market hasn’t rebelled in the face of such rocketing debt totals, sending interest rates upward and making a nonsense of the current political discourse about “ending the deficit, on a current basis, as soon as possible in the next Parliament” – the latest form of weasel words – is that our gilts market is rigged, propped up with printed money.

The Bank of England now owns more than a third of the UK’s sovereign debt. This is an alarming state of affairs, amounting to banana-republic-style debt monetization, being hidden in plain site. I’ve watched all the leaders’ TV debates, and endless campaign interviews, waiting in vain for a presenter to raise these uncomfortable truths – the kind of truths that are now being openly discussed not only by investment professionals, but also ordinary business folk and punters outside of the UK’s media bubble.

Why is the British government spending as much on debt interest as defence? Can the Western world keep printing money like crazy? Aren’t our banks still too-big-to-fail – because that’s what the numbers show?

This has been a deeply unsatisfying election campaign. The debate has been narrow and almost entirely stage-managed. Party leaders have, for the most part, been cocooned, kept away from proper “hustings” in front of the general public.

It’s looks likely we’ll get a deeply uncertain outcome, of course, not just a hung Parliament, but perhaps a Parliament in which the biggest party isn’t even in government. Then there’s the very real prospect that Thursday vote could eventually result in the UK breaking up, as the Scottish National Party, having just lost a referendum, commits the democratic outrage of soon posing the same question again.

The SNP look set to control 40-plus Westminster seats and wield massive UK-wide influence, after winning the support of just a tiny slice of the British electorate. Ukip, meanwhile, could well get more actual votes that the Liberal Democrats, but end up with less than a tenth of the Lib Dems’ number of seats. That is first-past-the-post democracy – a system that works well when it works, but sometimes, when the race is close and parties are fracturing, causes some really weird and unfair outcomes. This almost certainly indecisive election result, and the wrangling that will follow, will deeply dismay the voting public.

What could dismay them even more, though, is if economic gravity prevails and the UK finds itself, once again, in the eye of a debilitating financial storm.